Is "Cash for Clunkers" Actually Stimulating the Economy?

“It’s an interesting issue. I mean, I have qualms about the concept, but there is no doubt that that very extraordinary response is a very important indicator that the state of confidence in the economy is beginning to pick up. If we had been — the clunker program had been put in place six months ago, it would have probably been a dud.”

FoxNewsreports, “Greenspan said that the program has worked to get people to buy cars and move stock, but he wouldn’t necessarily recommend it as an economic fix.”

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The reality is, if you subsidize anything enough, people will buy it. And unfortunately for Americans, these $3,500 to $4,500 tax credits for more fuel-efficient cars do not come from Santa. The taxpayers are left to foot the bill. It’s worth stressing again that just because a policy is successful does not make a good policy. In fact, any policy that destroys perfectly good cars is probably the opposite of good (as many know, the subsidy is only given to consumers if the dealership destroys the used car).

Yet proponents of Cash for Clunkers suggest the program is win-win-win. Good for the economy, good for the consumer, and good for the environment.

While it’s good to see that consumer confidence may be on the rise after a long slump, it’s not clear whether or not consumers are increasing spending or simply shifting it. When consumers make the commitment to purchase a new vehicle, they will likely cut spending elsewhere to maintain their budget. This was the case in Germany where retailers took a big hit when the German government implemented a similar program.

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Expanding the program is, as Senator Jim DeMint (R-S.C.) put it, forcing our “children and grandchildren to have to pay for these cars.” Some have suggested that car sales would have gone up regardless and The Economist blog FreeExchange notes that “households out there looking to buy new cars aren’t those most in need of government assistance at this time.”

“Now, as we’ve noted before, the actual environmental benefits of this program may well prove modest. The efficiency requirements for the new car were fairly lax: You could in theory trade in a Hummer that got 16 mpg and get $3,500 toward a brand new 18 mpg SUV. That’s still an upgrade (and, in fact, that trade would actually save more gas than upgrading a 30 mpg sedan to a 35 mpg vehicle), but it’s a meager one. And any energy savings from a marginal upgrade like that could be dwarfed by the energy required to manufacture the new vehicles (particularly since dealers have to junk the “clunkers” that get traded in—many of which are perfectly good, albeit inefficient, cars).”Freedomnomics author John Lott adds,

“Oddly, it doesn’t really matter what the difference is in the gas mileage between old ‘clunkers’ and new cars. Replacing an 18 mpg car with one that offers 22 mpg, gets you a subsidy. But you cannot get a subsidy if you replace a 19 mpg car with one getting 45 mpg.”

In the long run, cash for clunkers could have serious adverse consequences for consumers’ behavior when it comes to purchasing goods. If consumers come to expect a handout from the government, they may hold off on buying a new product. When the government provides subsidies, whether it is to businesses or individuals, it creates a dependence that isn’t easily forgotten. Cash for clunkers is simply another government spending spree going straight to the auto companies at the expense of the taxpayer. Lott goes on to say, “Only in Washington could a program that is spending money 13 times faster than was planned be labeled a ‘success.’”